In my years as a retirement and income specialist, I have run across more than one person who claims they hate annuities. More often than not, this position is based more on what one of their relatives told them or what they heard from Dave or Suzy on television than on a genuine understanding of the annuity product. However, when I point out to prospective clients that if they have a Social Security number, they already OWN an annuity, the defiance and conviction ebb out of their voices. “Really? Is social security an annuity? Hmm. I suppose it is. I never thought about that.”
In essence, your Social Security is a government-issued annuity backed by the full faith and credit of the government. There are definite differences between Social Security and privately-issued annuity products. Still, both have, as their primary goal, the creation of lifetime streams of retirement income. Many financial experts consider Social Security to be the best inflation-protection annuity due to its periodic cost-of-living adjustments. For this reason, Social Security is an essential component of retirement planning in the United States.
Private annuities: Creating streams of guaranteed income when you need it most.
In the 21st Century, very few people are privileged enough to have pensions waiting for them when they stop working. Instead, they must make do with cobbling together a successful retirement plan using many confusing and often complex financial products. Privately issued modern annuities are an effective means of supplementing Social Security and are the only products that can provide guaranteed streams of predictable income. In the case of private annuities, these guarantees are based on the issuing company’s ability to pay claims.
Modern annuities are not “one size fits all.”
Many people, including some purported money experts, claim that annuities are expensive and loaded with fees. However, this is true for only a handful of annuity products, such as variable annuities. The most valuable annuities for planning have no fees or hidden charges. For example, single premium immediate annuities (SPIAs) typically have no annual expenses. SPIAs are often selected by those who need their payouts to start in a year or less. Deferred income annuities (DIAs) function much like SPIAs. However, DIAs are usually best for those who will not need the income for several years. DIAs also have no annual fees. Qualified Longevity Annuity Contracts (QLACs) are a type of annuity created by the IRS and funded with cash from a person’s IRA or another qualified plan. There are also MYGAs (multi-year guaranteed annuities) designed to take the place of CDs in a portfolio.
The Bottom Line
Some people hate annuities, often for no good reason. However, for people looking for more certainty in their planning or who want to protect their principal and have income for life, having an annuity in the mix can provide greater peace of mind. Knowing that there is one income stream that is not subject to market volatility may help pre-retirees confidently place money in more aggressive instruments so they can earn more and make up for lost time.
There is no such thing as an “ideal” annuity that is right for everyone. Depending on your situation, you may not want or need an annuity at all. The only way to know that, though, is to put your hatred of annuities on hold, sit down with an annuity expert and ask them questions about these proven retirement planning tools.